Martin Midstream Partners L.P. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts below are in millions unless noted. The partnership operates Gulf Coast-focused terminalling and storage, transportation, sulfur services, and natural gas liquids (NGL) businesses.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $140.6 | $187.3 | $339.5 | $427.4 |
| Operating income | $8.0 | $5.0 | $23.6 | $14.6 |
| Net income (loss) | $(2.2) | $(191.2) | $6.6 | $(194.8) |
| Adjusted EBITDA from continuing operations | $23.9 | $25.2 | $54.9 | $50.8 |
| Distributable cash flow from continuing operations | $12.5 | $8.0 | $30.8 | $12.7 |
| Cash from operating activities | — | $44.6 | $24.7 from continuing operations |
Q2 operating margin was approximately 5.7%, versus 2.7% a year earlier; first-half operating margin was approximately 6.9%, versus 3.4%. Q2 net loss was from continuing operations; the much larger 2019 net losses included the $178.8 million loss on sale of the natural gas storage business, reported as discontinued operations. First-half 2020 results also included a $3.5 million gain on repurchase of senior notes. Cash used in investing activities was $13.1 million in H1 2020, including $19.1 million of property, plant and equipment spending. Cash used in financing was $34.3 million; cash fell to $0.1 million from $2.9 million at year-end 2019.
Balance sheet at June 30: Total assets were $617.0 million and partners’ capital was negative $33.8 million. Debt, net of issuance costs, totaled $541.0 million: $364.2 million of 7.25% unsecured notes due February 2021, classified as current, and $176.8 million drawn on the revolving facility. Finance lease obligations were $4.3 million. Current liabilities were $446.5 million against current assets of $142.7 million. The filing reports only $33.7 million of additional borrowing capacity after covenants, despite $197.3 million of nominal capacity after existing revolver draws and letters of credit.
Material changes versus the prior period
- Revenue fell 25% in Q2 and 21% in H1. The largest factor was lower NGL product prices: Q2 NGL revenue declined 47%, while H1 declined 35%. Transportation revenue also weakened, down 25% in Q2 and 13% in H1, reflecting reduced utilization, miles, rates, and fuel surcharges.
- Operating income improved year over year, principally due to stronger sulfur-services and NGL segment results and lower interest expense. Q2 adjusted EBITDA nevertheless declined 5%; H1 adjusted EBITDA rose 8%.
- Interest expense declined 37% in Q2 and 33% in H1, largely reflecting lower revolver balances and reduced amortization of debt issuance costs.
- COVID-19-related impairment testing resulted in $4.4 million of long-lived-asset impairment charges in Q1, including $3.1 million in terminalling and storage and $1.3 million in transportation. No goodwill impairment was recorded. The remaining assets previously classified as held for sale no longer met that classification at June 30.
Outlook, financing, and risks
- Debt restructuring: The partnership entered a restructuring support agreement concerning its 2021 notes. The proposed exchange included 11.50% second-lien notes due 2025; eligible holders could also participate in a rights offering for 10.00% 1.5-lien notes due 2024, intended in part to fund cash tenders at $650 per $1,000 principal. By the early participation date, tenders totaled about $335.5 million, or 92.045% of notes. The minimum participation threshold was subsequently reduced from 95% to 92% and was met. As of the filing, closing was expected on or about August 12, subject to other conditions; the partnership said the Plan would not be filed if the offers closed.
- Going concern and refinancing risk: Management stated that the debt maturity and facility provisions raised substantial doubt about the partnership’s ability to continue as a going concern pending successful refinancing. Failure to complete the exchange or Plan could trigger revolver default, acceleration, and cross-defaults. The filing’s expected closing was not yet a completed transaction.
- Revised credit terms: The July 8 facility amendment contemplated reducing revolver commitments from $400 million to $300 million, higher pricing and a 1% LIBOR floor, excess-cash prepayments, and new leverage and interest-coverage covenants. It also restricts quarterly distributions above $0.005 per unit unless leverage is below 3.75x. The partnership declared a Q2 distribution of $0.005 per unit, or $0.02 annualized.
- COVID-19 outlook: Management expected adverse impacts to continue through the rest of 2020, with the severity uncertain. Reduced refined-product demand and refinery utilization could pressure transportation, packaged lubricants, NGL butane optimization, and sulfur prilling volumes. Management expected storage to be comparatively resilient under minimum-volume commitments and expected sulfur logistics and reservation fees to continue. It was pursuing expense reductions and deferring some maintenance and growth capital spending until 2021. No formal earnings guidance was provided.
- Other exposures: The partnership had no open commodity hedges at June 30 and was exposed to variable-rate debt; a 100-basis-point increase was estimated to raise annual interest expense by approximately $1.8 million. A customer-related defense and indemnity dispute remains unresolved, with exposure unclear if the case is reopened or an insurance claim succeeds. Related-party transactions are significant: Martin Resource Management Corporation controls the general partner and supplies services; its sales represented about 15% of Q2 revenue.
Important facts for investors to verify
- Whether the exchange offer and cash tender closed as expected, the final amount and terms of debt exchanged or repurchased, and the resulting principal due in 2021.
- Post-restructuring revolver availability, maturity, pricing, covenant headroom, and compliance under the amended facility.
- Whether cash generation and liquidity can sustain operations amid very low cash balances, substantial current liabilities, and COVID-19-related uncertainty.
- Whether the distribution remains at $0.005 per unit and how distribution restrictions apply under the revised credit agreement.
- Whether reduced refinery demand leads to further asset impairments, weaker segment results, or additional expense and capital reductions.